Opinion: Global competitors put the heat on locals in grocery
It wasn’t Christmas pudding that has given Coles, Woolworths and Metcash supermarket executives indigestion in recent weeks, but two significant developments involving global competitors that are carving significant inroads into food and grocery sales.
In December, Costco revealed it generated $1.3 billion in sales for the year to August 31, 2015 and ominously posted a solid pre-tax profit since its entry into the Australian market in August 2009.
The second development to chill the spines of the local supermarket operators was the confirmation that Aldi will open its first stores in Adelaide on February 3, the opening gambit of a $750 million expansion into West Australia and South Australia.
And if that wasn’t enough to trouble the locals, they might well have further cause to sweat and tremble with another international discounter, Lidl, assessing opportunities in the Australian market.
Aldi, the German discounter, and Costco, the American membership discount store, are now making serious inroads into the market shares of Woolworths, Coles and the IGA banners, owned by Metcash.
The two international retailers are pegging back market growth and hitting the sales, margins and earnings of the local supermarket chains, achieving higher comparable sales returns as customers, fired up with a missionary zeal, keep directing friends and family to Aldi and Costco.
Aldi already has around 400 stores in the eastern seaboard states and expects to open more than 60 new stores in calendar 2016, including up to 20 stores each in West Australia and South Australia.
Celebrating its 15th year of trading in Australia in January 2016, Aldi currently has more than 125 new stores on its current development program and has started evaluating opportunities in New Zealand.
Costco has surprised most analysts with its slow but steady rollout of stores in the past six years, especially given the apparent success of the format with customers and the strong growth in revenues and now in profits.
Costco currently has eight stores in Australia, with three more expected to open in 2016, at Marsden Park in Sydney, Epping in Melbourne and Brisbane.
The chain’s initial business plan envisaged a 20-store rollout and the retailer is now evaluating regional centres such as Newcastle, Wollongong and Darwin, as well as further capital city metropolitan locations.
While Aldi’s store development program aims to establish an extensive network of supermarkets, Costco is pursuing a destination store strategy built around key locations with large trading catchments.
Underlining the strong comparable store growth for Costco, the retailer increased revenues by 50 per cent to $1.32 billion in the 12 months to August 2015 despite only adding one new store, in Adelaide, in that period. Adding petrol sales to its offer helped revenues along, but most of the gains came from attracting more customer members.
Drawing on deep pockets from its US parent for close to $500 million in capital funding, Costco has pursued a deliberate strategy that is expected to see the retailer serve more than one million customers this calendar year and continue strong double-digit revenue growth.
Costco is also set to further boost its bottom line after posting a pre-tax profit of $22.7 million in the 2015 financial year, compared with a pre-tax loss of $10.7 million in 2014.
Retained losses for the retailer have fallen from $44.5 million in 2014 to $30.2 million in 2015 on the back of its solid trading performance.
Costco sales have more than doubled over the past two years, from $612 million in 2013, eclipsing Aldi’s growth and leaving Woolworths, Coles and the independent supermarkets looking anaemic by comparison.
In market share terms, Costco has captured around 1.5 per cent of the $90 billion grocery market, but would be expected to double that within 12 to 18 months with new stores and organic sales growth and to get close to five per cent market share with projected revenues of more than $4 million within the next five years.
According to an IBIS World report released late last year, Aldi has a market share of 8.1 per cent. But some analysts suggest its share is closer to 10 per cent and has the prospect of a significant boost as it adds more than 60 new stores this year, particularly in the two new state markets.
Woolworths currently retains leadership in market shares with around 40.2 per cent, but Coles has been gaining ground with stronger sales growth that has taken share from both Woolworths and the IGA independents. Coles’ market share is currently around 35 per cent.
Aldi rolls west
Aldi launched in South Australia on February 3, opening stores at Seaford Heights, Hallett Cove, Woodcroft and Parafield Gardens by month’s end, and a further four stores in March as part of a store development plan for 50 stores in the state.
Further Aldi locations confirmed for South Australia include Modbury, Noarlunga, Mount Barker, St Agnes, West Lakes, Hawthorn, Victor Harbor, Blakeview, Smithfield, Kilburn, Gilles Plains, Berri, Marion, Aldinga, Evanston, Nuriootpa, Golden Grove, Salisbury, Mount Gambier, Port Pirie and Yorke Peninsula.
The discounter will launch in West Australia mid-year with a 70-store network on the drawing board, including Cannington, Southern River, Halls Head, Kwinana, Rockingham, Australind, South Lake, Joondalup, Camillo, Midland, Mundaring and Ellenbrook.
The new store openings and continued comparable store growth for Aldi is expected to see the chain pushing towards $9 billion in sales within 12 months.
Old issues, more pain
The strong growth of Aldi and Costco and their popularity with shoppers is not a new issue for Coles, Woolworths or Metcash, the listed wholesaler that owns the IGA independent banners, but the progress of both the international retailers is creating increasing pain.
Aldi and Costco have already forced the local retailers to change their businesses to maintain sales and earnings growth as food and grocery revenues and profits stagnate, if not fall, to the global competitors.
In Woolworths’ case, the response to the challenge has proved disastrous, with the retailer forced to abandon its Masters Home Improvement venture that was expected to provide a new revenue and profit stream.
Similarly, Metcash has been forced to abandon a foray into the automotive accessories and servicing markets, although the wholesaler has investor support for the acquisition of some of Woolworths’ hardware venture assets, especially the Home Timber and Hardware chain.
Metcash acquired Mitre 10 as part of a strategy to augment its food and liquor business and would improve the scale and profitability of its hardware business if it could merge the Home Timber and Hardware business, although Inside Retail Weekly would anticipate a future share market listing for an integrated Mitre 10-Home Hardware retail venture.
Wesfarmers, the owner of the Coles chain, has also responded to the Aldi and Costco challenge, venturing overseas with its Bunnings division acquiring the Homebase home improvement chain in the United Kingdom.
The expansion of Aldi and Costco is expected to inflict most damage on the IGA supermarkets as, for the first time in 2016, it goes to head to head with the strongest independent store network in South Australia.
The two global chains will be direct competitors to the Foodland IGA chain, which has a market share in South Australia of around 32 per cent. But the independent stores will also be buffeted by pricing and other initiatives by Coles and Woolworths to protect their businesses and market shares.
Foodland lifted sales by just 1.2 per cent in the 2015 financial year to $2 billion and plans to add 20 stores in the next four years. But it remains vulnerable to an expected $500 million Aldi sales grab within 12 months, as well as substantial revenue growth from the Costco store that opened in Adelaide last November.
It remains to be seen whether or not Woolworths and Coles can protect their market shares in the short term as Aldi and Costco continue to gain momentum. But it is clear that they will face pressure on margins and earnings and that they will not be able to pass on that pressure to suppliers as they have done so often in the past.
Woolworths is currently before the courts for abusing its market position with supplier charges that the Australian Competition and Consumer Commission alleges were unfair and contravened competition law.
Coles is also under scrutiny and Inside Retail Weekly has been told the retailer raised eyebrows late last year with its views that suppliers were charging too much for their products.
Coles is pushing back on the ACCC’s attempts to prevent abuse of market power and to ensure that the grocery code of conduct is not simply a public relations document.
The ACCC and its chairman, Rod Simms, are aware that Woolworths and Coles are facing a new era of competition from Aldi and Costco and, possibly in the future, the German discounter, Lidl, and they are keen to ensure that the retailers don’t unfairly lean on suppliers in order to protect their market shares, sales and earnings.
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